I J A B E R, Vol. 11, No. 2, (2013): 163-183

* Sr. Principal, Professor & Head PG Department of Commerce and Management, Jaysingpur Collegeof Arts, Commerce, Science and Computer Science (UG & PG) A/post Jaysingpur – 416 101, Dist.Kolhapur, Maharashtra, E-mail: dr.manojkumargandhi@gmail.com

ROLE OF BANKS IN FINANCIAL INCLUSION IN INDIA :ISSUES, CHALLENGES AND STRATEGIES

M. M. Gandhi*

Abstract: Access to finance by the poor, disadvantaged and underprivileged group is aprerequisite of poverty alleviation on one hand and the economic growth on the other. Inthe struggle against poverty, the financial inclusion is a crucial element. Large sections ofthe rural population have no access to financial services and their only recourse is to borrowfrom moneylenders at the exorbitant charges causing exploitation. The main reason whythe large section of the rural population still remains under below poverty is financialexclusion, which is proving to be a major obstacle in the path of India’s economic growth.The Reserve Bank of India (RBI)’s dictate (2005) obligated the Banks to adopt the nationalpolicy of financial inclusion and take initiatives and suitable measures therefore. The objectivedata derived from the RBI’s reports and other empirical studies unequivocally pinpoint thatthe main reasons of financial exclusion are lack of opportunities and access to finance, financialilliteracy, besides poor performance, apathy and negative approaches of the Banks. Therefore,financial inclusion, today, has become the national objective and major concern for theeconomic policy decision makers. This paper critically addresses all concerned issues involvedin achieving the national objective of achieving the complete financial inclusion. This papercritically evaluates the initiatives taken by the Banks in financial inclusion and the effortsmade for IT enabled financial services, on the basis of the objective data derived from theRBI’S reports and other empirical studies.

This paper stresses the need of matured, positive attitude and approach and sound strategyto achieve complete financial inclusion. This paper also looks at some of the business modelsand essential elements of profitable models for financial inclusion so as to increase themeaningful and whole hearted participation of the banks in achieving complete financialinclusion.

Keywords: Poverty alleviation, financial exclusion, financial illiteracy, Financial Inclusion,RBI, Information Technology, Business and Profitable models.

I. INTRODUCTION

Financial exclusion is the main cause of poverty. Lack of opportunities and accessto finance besides financial illiteracy are the main causes of financial exclusion.Financial exclusion is proving to be a major thorn in the path of Indian economicgrowth. Access to finance by the poor, disadvantaged and unprivileged group is aprerequisite for poverty reduction and social upliftment. One of the main reasonswhy the large section of the rural population still remains under below povertyline is lack of opportunities and access to finance besides financial illiteracy.

Large sections of the rural population have no access to financial services andtheir only recourse is to borrow from money lenders, who charge exorbitant rates.Also, ignorance is rife, with concepts like insurance virtually unheard of. One ofthe main reasons why mass poverty is persisting in India is that the problem offinancing the poor still remains unresolved (RBI, 2011a). With almost all states showmore than 60% of populations below the poverty line. Projections based on NSSOdata present a disturbing picture as population cut offs for average consumptionfor almost all states fall between the sixth and seventh deciles, statistics for whichare available in its report “Key indicators of household expenditure in India.”Further fine tuned, they deliver a precise percentage of population below the averagespends (Sunday Times, 2012).

The large section of population below the expenditure curve also points to aworrying inequity in incomes, something that should concern planners as thegovernment looks to target benefits for those who need them through initiativeslike food security and employment guarantees (Sunday Times, 2012). India’sschemes might be off target, or suffering from poor reach while benefits of economicgrowth are not meeting the government’s objectives of “inclusive growth” as it isevident from the data (vide Table-I) that there is a concentration of buying powerin the top 30%-35% of the population. The 60-plus% of population below the averagemonthly spending is clearly not progressing as fast as the segment whose incomeand expenditure is disproportionately influencing the statistical mean (SundayTimes, 2012). Among the states, there is not much to choose between those oftenstigmatized as “backward” like UP and Bihar, Gujarat and Maharashtra. Even inthe better off states, the percentage of rural populations below the average monthlyexpenditure line is above 60%. In urban areas, it is a shade under 60% for Gujarat,but almost 70% for Maharashtra (Sunday Times, 2012).

II. FINANCIAL EXCLUSION

Nature, Causes Costs and Consequences of Financial Exclusion

Financial exclusion is broadly defined as the lack of access by certain segments ofthe society to suitable, low-cost, fair and safe financial products and services frommainstream providers. Thus the essence of financial inclusion is to ensure that arange of appropriate financial services is available to every individual and enablethem to understand and access those services. Apart from the regular form offinancial intermediation, it may include a basic no frills banking account for makingand receiving payments, a savings product suited to the pattern of cash flows of apoor household, money transfer facilities, small loans and overdrafts for productive,personal and other purposes, insurance (life and non-life), etc. (Chattopadhyay,2011). Two major factors have often been cited as the consequences of financialexclusion. First, it complicates day to day cash flow management- being financiallyexcluded means households and micro and small enterprises deal entirely in cash

Table I

Rural Urban

State Average % Average % Belowmonthly Below monthly This

spending This spending

Andhra 1,234 63.9 2,238 67.8Arunachal 1,546 64.0 1,947 61.9Assam 1,003 59.4 1,755 60.2Bihar 780 60.6 1,238 66.2Chandigarh 784 62.1 1,674 66.0Delhi 2,068 62.1 2,654 63.2Goa 2,065 61.2 2,644 62.5Gujarat 1,110 60.6 1,909 60.0Haryana 1,510 60.6 2,321 69.2Himachal 1,536 64.5 2,654 64.9J&K 1,344 61.0 1,759 66.6Jharkhand 825 64.6 1,584 67.9K’taka 1,020 62.8 2,053 64.6Kerala 1,835 67.3 2,413 69.0MP 903 64.0 1,666 66.8Maharashtra 1,153 61.0 2,437 69.1Manipur 1,027 60.1 1,106 68.7Meghalaya 1,110 61.0 1,629 59.8Mizoram 1,262 59.5 1,947 58.0Nagaland 1,476 60.8 1,832 60.8Orissa 818 62.4 1,548 67.0Punjab 1,649 65.9 2,109 65.5Rajasthan 1,179 67.0 1,663 65.3Sikkim 1,321 68.7 2,150 53.5TamilNadu 1,160 63.3 1,948 64.9Tripura 1,176 63.8 1,871 64.4Uttar Pradesh 899 62.8 1,574 70.0Uttarakhand 1,747 83.6 1,745 62.6West Bengal 952 60.6 1,965 68.4All India 1,054 64.47 1,984 66.7

Notes: Average daily consumption expenditure per capita per day for rural areas is Rs. 35.10 and forurban areas in Rs. 66.10.

Source: Sunday Times of India, “Times Nation” New Delhi Edn. 29 April 2012, P. 15.

and is susceptible to irregular cash flow. Second, lack of financial planning andsecurity in the absence of access to bank accounts and other saving opportunitiesfor people in the unorganized sector limit their options for providing for themselvesfor their old age (Rabha, 2012).

The Report on Innovative Financial Inclusion from the Access throughInnovation Sub-Group of the G20 Financial Inclusion Experts Group underlinesthe world scenario of financial exclusion:

• More than two billion adults do not have access to formal or semi-formalfinancial services;

• One billion people with mobile phones do not have even a basic bankaccount, (G-20, 2010).

Broadly, the issue of cost of financial exclusion may be conceived from twoangles, which are intertwined. First, the exclusion may have cost for individuals/entities in terms of loss of opportunities to grow in the absence of access to financeor credit. Second, from the societal or the national perspective, exclusion may leadto aggregate loss of output or welfare and the country may not realize its growthpotential. Access to a bank account, credit and insurance are now widely regardedas essential supports for personal financial management and for undertakingtransactions in modern societies (Rabha, 2012).

The financial exclusion can impose significant costs on individuals, familiesand society as a whole. These include (i) barriers to employment as employers mayrequire wages to be paid into a bank account; (ii) opportunities to save and borrowcan be difficult to access; (iii) owning or obtaining assets can be difficult; (iv)difficulty in smoothening income to cope with shocks; (v) exclusion frommainstream society. The principal barriers in the expansion of financial servicesare often identified as physical access, high charges and penalties, conditionsattached to products which make them inappropriate or complicated andperceptions of financial service institutions which are thought to be unwelcomingto low income people (Rabha, 2012). The lack of accessibility to financial servicesto the poor and disadvantaged class has been identified as one of the serious threatfor including the poor in the process of inclusive growth (NABARD, 2012).

III. ACCESS TO FINANCE: CONCEPTUAL FRAMEWORK

Concept and Definition of Financial Inclusion

The term ‘Financial Inclusion’ was first coined in British lexicon when it was foundthat nearly 7.5 million persons did not have a bank account. Defining financialinclusion is considered crucial from the viewpoint of developing a conceptualframework and identifying the underlying factors that lead to low level of accessto the financial system (Raju, 2006).

Review of Literature

A review of literature suggests that there is no universally accepted definition offinancial inclusion. The definitional emphasis of financial inclusion varies acrosscountries and geographies, depending on the level of social, economic and financial

development; the structure of stake holding in the financial sector; socio-economiccharacteristics of the financially excluded segments; and also the extent of therecognition of the problem by authorities or governments. Broadly, financialexclusion is construed as the inability to access necessary financial services in anappropriate from due to problems associated with access, conditions, prices,marketing or self-exclusion in response to discouraging experiences or perceptionsof individuals/entities.

The poor need financial services mainly for three purposes, all of which call forequal attention (Rutherford, 2001) :-

� Firstly, to defray expenses related to education, house-building, invariablygo in for loans.

� Secondly, there are emergencies such as serious illnesses, death in the family,and property loss due to accident.

� Thirdly, there are investment needs to buy or build income-earning assets.Over the years, several definitions of financial inclusion/exclusion have

evolved. The working or operational definitions of financial exclusion generallyfocus on ownership or access to particular financial products and services. Thefocus narrows down mainly to the products and services provided by themainstream financial service providers. Such financial products may include moneytransmission, home insurance, short and long-term credit and savings. The reviewof literature suggests that the most operational definitions are context-specific,originating from country-specific problems of financial exclusion and socio-economic conditions. The operational definition of financial inclusion, based onthe access to financial products or services, also underscores the role of financialinstitutions or service providers involved in the process (Rabha, 2012).

The scope of financial inclusion (Rabha, 2012) can be expanded in two ways-(a) Through state driven intervention by way of statutory enactments, and(b) Through voluntary effort by the banking community itself for evolving

various strategies to bring within the ambit of the banking sector the largestrata of society. When banks do not give desired attention to certain areas,the regulators have to step into remedy the situation. This is the reasonwhy the Reserve Bank of India (RBI) is placing a lot of emphasis on financialinclusion.

Indian Approach to Financial Inclusion

Broadly, the policy approach adapted to financial inclusion in India can be dividedin two categories - the minimalist approach and the expanded approach : (a) Theminimalist approach for financial inclusion focuses on the provision of a bouquetof basic financial products and services; whereas, (b) The expanded approach forfinancial inclusion focuses not only on the provision of the basic banking products

but also other important ancillary financial products, which would also entail focuson consumer protection and education, particularly financial literacy for the newentrants to the formal financial system (Khan, 2012).

Importance of Financial Inclusion

In majority of the developing countries, access to finance (Khan, 2012) is now beingperceived as a public good, which is as important and basic as access, say, to safewater or primary education. A question that arises is whether financial inclusioncan be interpreted as a public good. A good is considered a public good if it meetsthe conditions of (a) ‘non-rivalness’ in consumption and (b) non-excludability.Financial inclusion meets these two criteria. One of the important effects of financialinclusion is that the entire national financial system benefits by greater inclusion,especially when promoted in the wider context of economic inclusion.

Financial Inclusion: India’s Position Compared with other Countries

The extent of financial exclusion in India is (Khan, 2012) found to be higher ascompared with many developed and some of the major emerging economies. Thewide extent of financial exclusion in India is visible in the form of high populationper bank branch and low proportion of the population having access to basicfinancial services like savings accounts, credit facilities, and credit and debit cards.State wise percentage of households (GoI-FM, 2012), availing Banking Services in2011 (vide Table II), clearly show that there still remain a large number of householdswhich do not avail banking services, resulting to financial exclusion.

Table IIState wise Percentage of Households availing Banking Services in 2011

Sr. No. India/State/Union Territory # Percentage of Households availingBanking services

1. A & N Islands 89.32. Andhra Pradesh 53.13. Arunachal Pradesh 53.04. Assam 44.15. Bihar 44.46. Chandigarh 80.17. Chhattisgarh 48.88. Dadra & Nagar Haveli 56.79. Daman & Diu 65.410. Delhi 77.711. Goa 86.812. Gujarat 57.913. Haryana 68.114. Himachal Pradesh 89.115. Jammu & Kashmir 70.0

contd. table

16. Jharkhand 54.017. Karnataka 61.118. Kerala 74.219. Lakshadweep 85.320. Madhya Pradesh 46.621. Maharashtra 68.922. Manipur 29.623. Meghalaya 37.524. Mizoram 54.925. Nagaland 34.926. Odisha 45.027. Puducherry 64.028. Punjab 65.229. Rajasthan 68.030. Sikkim 67.531. Tamil Nadu 52.532. Tripura 79.233. Uttar Pradesh 72.034. Uttarkhand 80.735. West Bengal 48.8

All India 58.7

Source: Census of India 2011, (GoI-FM, 2012).

The following table summarizes India’s performance in the area of financialinclusion as compared with other developing as well as developed countries (videTable III).

Table III

Country No.of branches No. of ATMs Bank credit Bank deposits(per 1 lakh adults) (as % of GDP)

India 10.91 5.44 43.62* 60.11*Austria* 11.81 48.16 35.26 32.57Brazil 13.76 120.62 29.04 47.51France 43.11 110.07 56.03 39.15Mexico 15.22 47.28 16.19 20.91UK* 25.51 64.58 467.97 427.49United States 35.74 173.75* 46.04 53.14Korea 18.63 250.29* 84.17 74.51Afghanistan 2.25 0.50 11.95 21.4Philippines 7.69 14.88 27.57 53.02

Source: World Bank, Financial Access Survey, (2) Indian Exps 27-7-2012, (3) Khan, (2012)Notes: (1) Data given in the Table pertains to 2010. However, for rows/cells indicated as* Data pertains

to 2009. (2) As at end of 2010-11, [a] the number of ATMS per 1 lakh population stood at 6.3,[b] Bank Credit and Bank Deposit as a percentage of GDP stood at 50.10% and 66.10%respectively.

Sr. No. India/State/Union Territory # Percentage of Households availingBanking services

Measuring Financial Inclusion

The Rangarajan Committee (2008) has defined Financial Inclusion as -

“Financial Inclusion is the process of ensuring access to financial services and timely andadequate credit where needed by vulnerable groups such as weaker sections and low incomegroups at an affordable cost.”

One of the measures of the level of financial inclusion is the Financial InclusionIndex (Sarma, 2008). This index is based on, three basic dimensions of an inclusivefinancial system:- (i) Banking penetration, (D1); (ii) Availability of the bankingservices (D2), and (iii) Usage of the banking system (D3).

(a) The first parameter (D1), - ‘Banking penetration’ - is definitely the most criticalparameter for measuring the depth financial inclusion and is measured as aratio of bank accounts to the total population.

(b) The second parameter (D2), - ‘Availability of banking services’,- provides anindication to the number of bank outlets available per 1000 people to deliverfinancial services. The bank outlets may include the brick and mortar branches,ATMs, business correspondents, etc.

(c) The third parameter (D3) seeks to determine the ‘Usage of banking services’going beyond mere opening of accounts. Therefore, this is evaluated on thebasis of outstanding deposits and credits. Accordingly, the volume ofoutstanding deposit and credit as proportion on the net district domestic productis used for measuring this dimension.

According to the value of the index, Indian States can be classified into threecategories, (Table IV) i.e.,

[A] States having HIGH extent of financial exclusion.

[B] States having MEDIUM extent of financial exclusion.

[C] States having LOW extent of financial exclusion.

According to the empirical results, (vide the above Table IV) :

(a) Kerala, Maharashtra and Karnataka are some of the States havingwider (high) extent of financial inclusion as compared to other States ofIndia.

(b) Tamil Nadu, Punjab, Andhra Pradesh, Himachal Pradesh, Sikkim andHaryana fall under the category of medium financial exclusion.

(c) The extent of financial exclusion is found to be significantly low in North-Eastern and Eastern States, i.e., Assam, Nagaland, Manipur, Odisha, Bihar,West Bengal, etc.

The afore-stated analysis implies that all the States, except three categorizedas/under HFI have to go a long way in achieving financial inclusion.

Table IVState-wise Index of Financial Inclusion (IFI) based on Select indicators of

Financial Inclusion: Cross Country Analysis

State D1 D2 D3 IFI IFI Rank(Penetration) (Availability) (Usage) (Index of FI)

High Financial Inclusion (0.5-1)Kerala 0.70 0.81 0.28 0.54 1Maharashtra 0.62 0.29 1 0.53 2Karnataka 0.72 0.47 0.46 0.53 3Medium Financial Inclusion (0.3-0.5)Tamil Nadu 0.70 0.43 0.38 0.48 4Punjab 0.45 0.69 0.29 0.45 5Andhra Pradesh 0.56 0.30 0.41 0.41 6All-India 0.27 0.22 0.55 0.33 7Himachal Pradesh 0.42 0.40 0.18 0.33 8Sikkim 0.28 0.33 0.34 0.32 9Haryana 0.39 0.50 0.12 0.32 10Low Financial Inclusion (<0.3)West Bengal 0.24 0.38 0.23 0.28 11Gujarat 0.32 0.30 0.16 0.26 12Uttar Pradesh 0.28 0.31 0.15 0.24 13Meghalaya 0.21 0.28 0.14 0.21 14Tripura 0.31 0.22 0.08 0.20 15Orissa 0.26 0.23 0.11 0.20 16Rajasthan 0.25 0.22 0.12 0.19 17Arunachal Pradesh 0.20 0.16 0.14 0.17 18Mizoram 0.13 0.26 0.09 0.16 19Madhya Pradesh 0.18 0.21 0.08 0.16 20Bihar 0.15 0.24 0.08 0.15 21Assam 0.17 0.17 0.07 0.13 22Nagaland 0.03 0.04 0.07 0.05 23Manipur 0.00 0.01 0.01 0.01 24

Source: RBI Working Paper (Chattopadhyay, 2011)

Financial Inclusion and Inclusive Growth: What the Empirical Evidence Suggests?

Inclusive growth as a strategy of economic development has received renewedattention in recent years owing to rising concerns that the benefits of economicgrowth have not been equitably shared. Growth is inclusive when there is equalityof economic opportunities.

Financial inclusion makes growth broad based and sustainable by progressivelyencompassing the hitherto excluded population. Financial inclusion is no longer apolicy choice but a policy compulsion (RBI, 2011b). Empirical evidence shows thatcountries with large proportion of population excluded from the formal financialsystem also show higher poverty ratios and higher inequality. The inclusive growth

country analytics has a distinct character focusing on the pace and pattern of growth.Rapid pace of growth is unquestionably necessary for substantial poverty reduction,but for this growth to be sustainable in the long run, it should be broad-basedacross sectors, and include a large part of the country’s labour force. This analyticsof inclusive growth implies a direct link between the macro and micro determinantsof growth. Some of the important factors determining the level of financial inclusionin a country are per capita GDP, income inequality, adult literacy and urbanization.Further, physical and electronic connectivity and information availability such astelephone and internet usage also play positive role in enhancing financial inclusion.

The empirical findings strengthen the argument that financial exclusion isindeed a reflection of social exclusion, as countries having low GDP per capita,relatively higher levels of income inequality, low rates of literacy, low urbanizationand poor connectivity appear to be less financially inclusive. Financial inclusion,therefore, assumes importance as a policy objective (RBI, 2011b).

All Banks in the Country were advised by RBI, since November 2005, to take allmeasures and adopt suitable strategies. One element of the strategy enumerated,to achieve the desired target of Financial Inclusion, is through - (a) No-frills accounts,(b) diluted Know-Your-Customer (KYC) norms, (c) Banking Correspondents (BCs)and (d) use of Information Technology. Accordingly, all Public Sector Banks (PSBs),Private Banks (PBs), Cooperative Banks (CBs), undertook the mandated task,willingly or unwillingly, either in a phased manner or otherwise. They either startedopening their branches at the suitable villages or appointed their bankcorrespondents or adopted outsourcing method.

The progress of financial inclusion plans in India as on March 31, 2012 is depictedin the Table V, [vide next page]

Table VProgress of Financial Inclusion Plan in India

(as on March 31, 2012)

Banking outletsRural branches 24701BC outlets 120355Other modes 2478Total 147534Total number of ‘No frill accounts’ 103.21 million

(increase of 39.6%)Operations in NFA (2011-12)Outstanding balance Rs. 932.89 billionOverdrafts Rs. 3.39 billionTransactions through ICT based BC outlets (2011-12) 119.77 millionKCC credit Rs. 2.15 millionGCC credit Rs. 0.22 million

Source: Khan (2012)

IV. MAJOR ISSUES, CHALLENGES & STRATEGIES IN FINANCIAL CHALLENGES

There are several issues, challenges and strategies to achieve the target of completefinancial inclusion; however, for restricting to the theme of the paper and spaceconstraints, only major issues, challenges vis-à-vis strategies have been dealt with.1. Change in the approach of Banks: Only access to credit or banking is NOT

the financial inclusion: Achieving complete Financial Inclusion: It is oftennoticed that mere opening a Bank Account is taken or claimed as achieving thetarget of financial-inclusion. Many empirical studies and Usage Analysis revealthat after opening such bank accounts, hardly there are any transactions takeplace in such bank accounts. Banks must genuinely strive to provide the directedservices under the category or scheme of financial inclusion to the ruralpopulation, since they are the main pillars for the desired success. On thisbackdrop, the claims of policy-makers, banks, etc., the illusions created andmythical success stories spread must be tested on the basis of parametersenumerated on the background of the RBI’s norms and expectations, (NABARD,2012). Basically, though, the financial inclusion is meant to include all the sectionsof the society, who are mainly out of the net of the financial institutions,(Chattopadhyay, 2011), yet, financial inclusion does not mean merely openingof saving bank account but signifies creation of awareness about the financialproducts, education and advice on money management, offering debtcounseling, etc. by banks. Every society should ensure easy access to publicgoods, (Seth, 2011). Therefore, banking service being a public good should alsobe aimed at providing service to the entire population. However, empiricalstudies show that :(a) Some banks have no desire to achieve the complete financial inclusion;

(b) Some banks have formed opinion that the complete financial inclusion isnot possible and/or it is an empty and useless exercise;

(c) The Banks are ready or eager, but their branch employees are reluctant orgive lame excuses to implement the scheme of financial inclusion.

(d) Those who, unwillingly and reluctantly implement the scheme of achievingfinancial inclusion, assume that merely opening a bank account is theimplementation of scheme of financial inclusion.

(e) Affordable credits are made available only as compulsions.

(f) Only in rare cases some of the banks make attempts to provide financialadvice to the poor or disadvantaged people.

(g) The costs of serving the poor can be significant in the short-term, thereby,impacting profitability.

This attitude or mindset reflects a very narrow approach to tackling the problemof financial inclusion. Bankers should, therefore, change their mindsets, view

financial inclusion as a viable business proposition and adopt innovative methodsand low-cost delivery models to reach out to the poor. They should study thedifferent markets across India thoroughly and offer region-wise customizedproducts and services riding on the higher levels of trust enjoyed by them over theother financial service providers in rural India. It was in the context of financialinclusion of the excluded and to facilitate the electronic benefit transfer that bankswere directed (GoI-FM, 2012), to ensure opening of one bank account per family. Inorder to accomplish the objective and to have proper monitoring of the progressvarious modalities have been suggested. One of the vital obligatory modalities isregarding opening of one bank account per family. The Finance Ministry’s recent(May 15, 2012) directives regarding opening of one bank account per family tofacilitate electronic benefit transfer and financial inclusion, (GoI-FM, 2012), mandatethe banks that families must have one account in a bank on Core banking Solutionand having NEFT facility.

The statistics given in these directives depict that:

(a) Nearly 10 crore households were not availing banking services.

(b) As per 2011 census, about 58.7% households, comprising of 54.4% ruralhouseholds and 67.8% urban households, had reported availing bankingfacilities.

(c) Out of the 24.69 crore households, 14.48 crore households reported availingbanking services.

(d) Under Swabhimaan, over 3.25 crore bank accounts in rural areas have beenopened.

2. Relaxation in Regulatory Framework: The RBI, initially, in November 2005,set the population benchmark, which will help it, for taking its financialinclusion drive to the next level, mandating all Banks to reach out the villages,all habitations with population in excess of 2000, as per the 2001 census, eitherthrough the Bank Branches or through Business Correspondent (BCs). However,since 2011-12, the population benchmark is reduced to 1600 and above. Veryrecently, on 11 August 2012, the RBI asked Banks to drop the ‘no-frills’ tag fromthe basic savings accounts as the nomenclature has become a stigma. The RBIasked Banks to provide the ‘zero-balance’ facility in the basic banking accountsalong with ATM-cum-Debit Cards without extra charge. The Finance Ministrydirected the Banks were directed to reach out to villages with population of2000, as the population benchmark that all habitations with population in excessof 1600 must have a bank branch, which will help it take its financial inclusiondrive to the next level. The Finance Ministry, very recently, directed all state-run Banks to ensure that every household has at least one savings bank accountby end of June 2012, a move seen as a precursor to direct transfer of benefitsunder the government’s financial inclusion plan. For this purpose, the Banks

have been asked to launch a campaign to ensure that opening of new accountsand changes required in existing accounts are completed by June 2012, (Khan,2011).

3. Self Help Group-Bank Linkage Programme (SLBP): In the last two decades,the major institutional innovation in India for expanding financial system accessand usage for the poor and marginalized sections of the population has beenthe SBLP. The project provided a cost-effective SBLP model for providingfinancial services to the underserved poor. Being a ‘savings-first, credit later’model, credit discipline became a norm for Self Help Groups (SHGs) and ‘socialcollateral’ made them bankable. The model was initially successful in providingsolution to the twin problems faced by banks, i.e., low recovery of loans inrural areas and high transaction costs in dealing with small borrowers at frequentintervals, with a major positive impact of generating social and economicempowerment of the membership. However, despite the noteworthyaccomplishments of SHGs certain issues, such as, inadequate outreach in manyregions, delays in opening of SHG accounts and disbursement of loans,impounding of savings by banks as collateral, non-approval of repeat loans bybanks even when the first loan was repaid promptly, multiple membership,borrowings by SHG members within and outside SHGs, adverse consequencesof unhealthy competition between NGO promoted SHGs and Governmentpromoted/subsidy oriented SHGs and limited banker interface and monitoringcontinued to affect the programme in many areas. While the basic tenets of theSHGs being savings led credit product remain true even today, recentdevelopments have given rise to the need for crucial changes in the approachand design of SBLP to make it more flexible and client friendly. The revisedNABARD guidelines, popularly known as SHG2 (version 2), have sought toaddress some of the shortcomings of the earlier version, (Khan, 2011).

4. Microfinance Institutions (MFIs): The MFIs have served the underserved/unserved populace in the last few years and improved access to credit thoughthere have been quite a few debatable issues on the style of corporate governanceand ethics of conducting business on part of some of the MFIs. However, it hasbeen often realized that the MFIs do help in financial deepening and can remainan important segment of the Indian financial market keeping in view the presentlevel of penetration of the banking system. The conceptual frameworkunderlying MFIs requires a change. MFIs will have to revisit the mission andbusiness strategy and reinvent the sector to remain relevant in the system. Anew category of ‘Non Banking Financial Company-Micro Finance Institutions’(NBFC-MFIs) prescribed by the Malegam Committee (2011), created inDecember 2011 by RBI, is also facing difficulties primarily into micro financing.The NBFC-MFIs has got some relief from the RBI, which issued revised‘Directions cum Modifications’ in August 2012, (RBI, 2012). On this background,

these institutions have to revisit their business models to support the incomeearning ability of the borrowers and, at the same time, they remain economicallyviable. NBFC-MFIs will have to work hard in pursuit of transparency andresponsible finance, shaking off the perception that their motto is profiteeringat the cost of the poor but not profitability for sustainable and viable growth onone hand and take initiatives to retool the product redesign for garnering newcustomers and acquiring more share of the market on the other (Khan, 2011).

5. Business Facilitators (BFs)/Business Correspondents (BCs): The ICT basedagent bank model through BFs/BCs for ensuring door step delivery of financialproducts and services, prescribed by the RBI to act as intermediaries forproviding financial and banking services and ultimately addressing theproverbial last mile problem, initially created by the banks themselves, andlater improvised by number of innovations, bridging the connectivity gapbetween the service seekers, i.e., under-served populace, and the serviceproviders, i.e., the banks, have, however, raised a number of issues both for thepartner banks and also for the regulators. Viability of the BFs/BCs model ingeneral has remained a critical issue for which the model has not taken off asexpected. Further, banks and their BFs/BCs also exposed to huge risk of cashmanagement, particularly as cash dependence of the economy continues to bevery high. There is also huge requirement of hand-holding and training of theBFs/BCs to enhance the trust level of the end customers. In this context, thecurrent thinking of having lean, brick and mortar outfits of the banks (e.g. ultrasmall branches) to provide support to and supervise work of certain number ofBFs/BCs appears to be a step in right direction. The success of BFs/BCs modelalso hinges on adoption of technology, which in turn, is dependent on the degreeof compatibility and integration of technology being used by the banks andtheir BFs/BCs. There is a view that banks could also have their in-house BF/BC outfits in the form of separate trusts/subsidiaries with separate recruitmentand remuneration structure but under closer supervisory control.

6. Product Initiatives: To ensure that more and more people come within thebanking fold the banks should offer all the customers a ‘basic savings depositaccount’ with certain minimum common facilities and without the requirementof minimum balance. The services provided in this account should includedeposit and withdrawal of cash at the bank branches as well as ATMs, receipt/credit of money through electronic payment channels or by means of deposit/collection of cheques drawn by Central/State Government agencies anddepartments. Innovation of products for the specific needs of the poor isnecessary for achieving the ultimate objective of inclusive growth (Khan, 2012).

7. Mobile Banking: With the rapid growth in the number of mobile phonesubscribers in India, banks in collaboration with telecom companies are seekingto develop an alternate channel of delivery of banking services. Keeping in

view the issues relating to diversity of network providers in India, remittancecentric approach of such model and Know Your Customer (KYC) relatedconcerns, the RBI has advocated bank-led mobile banking model and issuedoperative guidelines to banks for effecting mobile-based banking transactions.The empirical studies indicate that banks are yet to fully exploit this technologyeven for their existing customers. The banks and the mobile operators reach aworkable understanding while protecting their mutual interests. Such anapproach would result in a ‘win-win’ situation for both and, more importantly,serve the larger cause of public good of financial inclusion (Khan, 2012).

8. Aadhaar-enabled Payment Systems (AEPS): The AEPS having the ability toservice customers of many banks based on the unique biometric identificationdata stored in the Aadhaar database is expected to empower a bank customerto use Aadhaar as his/her identity to access the respective Aadhaar enabledbank account and perform basic banking transactions like balance enquiry, cashwithdrawal and deposit through the BC. A pilot scheme in four districts ofJharkhand state is currently being carried out under which MGNREGA wagesto labourers are credited to their Aadhaar enabled bank accounts.

9. Innovative product lines & processes: Banks have to look at their policies andprocedures to develop new product lines rather than merely adopting thecomplex products of urban India in the rural milieu.

10. Financial literacy and awareness: There is a strong concern about the patheticattitude of the banks to arrange regular campaigns for spreading awarenessabout financial inclusion and financial literacy need to be intensified. Banksneed to do efforts in this area through innovative dissemination channelsincluding films, documentaries, pamphlets and road shows.

11. Customer service and consumer protection: Customer service is another issuethat needs closer attention. Mind-set, cultural and attitudinal changes at thegrass-root levels and user friendly technology at the level of branches of banksand BC outlets are needed to extend holistic customer service to the new entrantsto the banking system. Government, regulators like Reserve Bank of India,banks, service providers and consumers themselves have to play importantrole in developing a comprehensive approach to consumer protection (Khan,2012).

12. Issues and Challenges in ICT based Financial Services: Tapping TechnologyPlatforms: Banks need to make significant investments in Technology basedapplications, related research and development efforts, comprehensiveManagement Information Service (MIS) and monitoring and evaluation systemson one hand and collaborate with technology service providers (TSPs), mobilenetwork operators (MNOs), corporate houses and various categories of BCs todevelop efficient delivery models with a strategy aiming to create a facilitatingeco-system, leveraging on technology and promote partnerships of brick and

mortar branches including ultra-small branches with the ICT-based BC outletsfor evolving an effective financial inclusion delivery mechanism. Today, bankscan provide a bouquet of financial services through the various networks ofagents and branches by leveraging and fine tuning technology platforms.Technology holds the key to providing models for efficient delivery of smallvalue transactions in large volumes while reaping economies of scale. Theimplementation of such effective, scalable and platform-independent technologywill help drive down the cost of providing banking services to the poor. Further,technology helps in spreading financial literacy both as a delivery channel andas an intrinsic part of the learning process (e.g., instructional computer). Today,both the service providers and service seekers have a number of technologyoptions, such as, smart cards, micro-ATMs, ATMs, mobile technology, AadhaarEnabled Payment Systems (AEPS), etc. to choose from to provide/seek financialservices irrespective of their geographic locations. For the success of the ICT-based models, resolving technology related issues is the key.

13. Financial Inclusion as a Business Opportunity vis-à-vis Profitable Modelsfor Financial Inclusion: Financial inclusion initiatives would provide bankswith a low-cost and stable source of funds, helping them improve their asset-liability management (ALM). Rural India presents a remarkable opportunityfor banks and financial institutions to seek their fortunes and bring prosperityto the aspiring poor through financial inclusion. In a fast growing economylike India the poor are the middle class of tomorrow and banks could, therefore,ill-afford to ignore this segment. Banks, however, argue that while the benefitsof financial inclusion can be easily understood, the costs of serving the poorcan be significant in the short-term, thereby impacting profitability. Banks,therefore, need to take bold decisions and reach out to rural India with strategiesand business models which are beyond the realm of conventional thinking.Banks should refrain from deliberately adopting a uniform business model.Banks need to build its own strategy in line with its business model andcomparative advantage. A successful model should also represent a better waythan existing alternatives and also answer management guru Peter Drucker’sage-old questions: (a) Who is your customer? (b) What does the customer value?& (c) How do you deliver value at an appropriate cost? A (Ramon, 2011)profitable business model should consist of four elements: • a customer valueproposition • a profit formula • key resources • key processes.

Profitable models for financial inclusion could, therefore, have the followingfeatures* (*Note: These are concluding compilation of various options guided/suggestedon this theme to the banks by various authorities, viz., RBI-2008, RBI-2011a, RBI-2011b, RBI-2011c, RBI-2011d, NABARD-2012; and also by various experts and authorson this theme, including : Chaia et al.-2010, Khan-2011, Karmakar-2011, Nadkarni-2012, Nair-2012, Rabha, 2012, Raj-2011, Ramon-2011):

(a) Offering a clear customer proposition and customized bouquet of products:-To succeed in their financial inclusion initiatives, banks would need to offercustomers a clear proposition and a customized bouquet of productofferings. Banks need to offer the following services at a minimum costsand charges, as part of an overall ‘package’ to attract customers:� Advice on monetary issues, problems, needs and plans� Savings cum Overdraft account;� Remittance-products;� Kisan Credit Card/General Credit Card� Disbursements of Grants & Financial Assistance awarded by & in

accordance with the Central Govt., State Govt., Local authorities, otherFunding agencies, NGOs, etc.;

� Micro-Credits as per Bank’s own schemes;� Govt. directed Priority sectoral lending� Entrepreneurial Credit� Micro-Insurance.

-Each of these offer significant value to customer and enable banks to generatevalue through transaction fees.(b) Scalable business model with simple, user friendly low-cost technologies:-

Profitable business models, (Raj, 2011) would need to be scalable andincorporate simple, user-friendly and low-cost technologies so thatinvestments would be recouped and profits begin showing up as the numberof people serviced by a particular branch or outlet increases over time.

(c) Collaborate with local agents and for-profit companies:- According toconsulting giant (Raj, 2010 from Chaia et al., 2010), the basic problem of ‘lastmile access’ can be solved if banks can team up with retail outlets (businesscorrespondents) in low-income, often hard-to-reach areas to offer financialservices to rural masses, thereby, creating value both for themselves andtheir customers.

(d) Banks need to learn from both corporate India and the informal sector:-Banks need to innovate and improve service levels in order to provide thesame level of accessibility as the local money lender, friend or relative andopen branches/banking outlets in villages as inclusive banking goes beyondthe conventional notions of commercial banking.

(e) Subsidiary model to drive down costs:- Indian banks should explore thesubsidiary route to drive down distribution costs in their financial inclusiondrive.

(f) Strategy to gain benefits from Government scheme of MGNREGA :-, Banksneed to mould their strategies to gain benefits amendments made in August

2011 making mandatory under the law for state governments to ensure thatevery beneficiary of the MGNREGA scheme has a bank/post office accountand the disbursements are made exclusively through these channels, whichprovide opportunities to the banks and positively benefit financial inclusioninitiatives.

(g) Innovate and test-market pilot products/services:- Banks need to keep theirMIS updated and keep ground realities in mind while designing theirproducts/services for the poor. McKinsey’s report (2010) also suggests thatfinancial service providers should test-market low-cost pilots to see whichproducts/services are found acceptable before large-scale introduction.

VII. CONCLUSION

The problem of financial exclusion needs to be tackled with urgency if we wantour country to grow in an equitable and sustainable manner. Traditional andconventional banking solutions may not be the answer to address the problem offinancial inclusion in India. Banks, therefore, need to innovate and think ‘out-of-the-box’ for solutions to overcome the problem of financial exclusion in India. Theyneed to deploy new technologies and create financially viable models to takeforward the process of financial inclusion in an effective manner. This way banksin India would be doing a great service to the cause of financial inclusion andmake their name in history. Financial inclusion may be a social responsibility forthe banks in the short-run but will turn out to be a business opportunity in thelong-term. Financial Inclusion is no longer an option, but it is a compulsion. Theentire world is looking at this experiment in India and it is important that banksrise up to this challenge and meet it successfully. The current policy objective ofinclusive growth with financial stability cannot be achieved without ensuringuniversal financial inclusion. Pursuit of financial inclusion by adoption of innovativeproducts and processes does, however, pose challenge of managing trade-offsbetween the objective of financial inclusion and financial stability. In the Indiancontext, the Reserve Bank has always sought to balance the risk of partnershipsand product innovations with the ability to achieve greater penetration in a safe,secured and prudentially sound manner. The underlying belief is that only soundand strong institutions can promote financial inclusion in a sustainable mannerand, towards this end, prudent regulations have to be in place to achieve inclusionwhile protecting financial stability and consumer interest. By adopting appropriateregulatory framework for innovations in policies, partnerships, processes andproducts meant for financial inclusion, the Reserve Bank has sought to further thecause of inclusion without falling short of the policy goal of financial stability. Thestakeholders have come to realize the need for viable and sustainable businessmodels which focus on accessible and affordable financial services, products andprocesses, synergistic partnerships with non-bank entities including the technology

service providers for efficient handling of low value, large volume transactions,particularly in remote, banking shadow areas and appropriate regulatory and riskmanagement policies that ensure financial inclusion and financial stability movein tandem.

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